Canadian regulators may review terms of mortgage stress test

TORONTO (Reuters) - Canada will consider changing the terms of a stress test designed to cut out risky mortgage lending if market conditions change, one of the country’s top banking regulators said on Tuesday.

FILE PHOTO - A real estate assembly of houses marked for demolition stand next to a billboard advertising a future condominium to stand in their place, in Toronto, Ontario, Canada January 6, 2019. REUTERS/Chris Helgren

The Office of the Superintendent of Financial Institutions, Canada’s main financial regulator, introduced rules last January requiring banks to test borrowers’ ability to repay mortgages at an interest rate 200 basis points above their contracted rate.

Reuters reported on Monday that the regulator was coming under increasing pressure from banks and mortgage industry lobbyists to relax the requirements of the test.

OSFI’s assistant superintendent, Carolyn Rogers, said on Tuesday the regulator understood the need to monitor the effects of the stress test and of interest rate rises. The Bank of Canada has hiked rates three times since January 2018.

“We’re always watching,” Rogers said in an interview. “If we see a material change in the risk environment, we’ll respond to that with changes to our policy.”

The stress test was part of a range of measures, known as B-20, designed to ensure banks maintained vigilant mortgage underwriting standards at a time of red-hot housing markets in Toronto and Vancouver.

However, since the rules were introduced 13 months ago, markets have cooled, with sales falling in each of the last four months of 2018, and Rogers said it was not too early to review the test’s criteria.

“We don’t look at this, necessarily, in terms of length of time, but what are the conditions? What’s the risk environment? That will be what prompts us to make changes to B-20,” she said.

Aside from interest rates, Rogers said other factors which are reviewed include record levels of household debt and general economic uncertainties that might affect employment levels including trade.

Royal Bank of Canada, the country’s biggest lender, is currently offering a five-year fixed mortgage rate of 3.74 percent, meaning potential borrowers are tested, under B-20 rules, on their ability to make repayments at 5.74 percent.

Any changes to the policy would be subject to consultation with banks and would not happen overnight, Rogers said.

“It’s one thing to put a guideline out, it’s another for the banks to make the changes they need to implement that guideline,” she said.

Some mortgage experts have questioned the need for having a stress test once interest rates return to a more normal level but Rogers said it will still have a role to play, ensuring borrowers can withstand financial stresses.

“It’s prudent, no matter what the interest rate environment is and no matter what the economic conditions are, that you have a little bit of breathing room,” she said.